Tax Saving & Benefits of Home Loan in India

Certainly “Saving Tax” on your income is always a spot of interest for each one of us and why not save on it when there is a legal way?Home Loans are one of a better ways for saving on your taxes for a longer duration. So how it exactly works?

There are different sections of the “Income Tax Act” of India under which you can avail deductions on the taxes, confers you to save a signification amount on your total tax liability.

There are two sections of the “Income Tax Act” of India which will allow you to get a deduction if you have taken a home loan; this of course ignores home loans from “private sources” (Friend, Family, etc). The two sections are here under.

• Sec 24(b) of the Income Tax Act, 1961
• Sec 80(c) of the Income Tax Act, 1961

Section 24(b) is with respect to the “Interest Paid” on the Home Loan and Section 80(c) is with respect to the “Principal Repayment” of the Home Loan.

The Section 24(b) of the Income Tax Act, 1961 is applicable on Home loan for purchase of house or construction of the house property. You can avail a deduction of up to Rs. 1,50,000 of youtotal tax liability, Also reconstruction or renewal or repairs is eligible for deductions under the said section.

The Section 80(c) of the Income Tax Act, 1961 allows you a deduction of up to Rs. 1,00,000 on the principal repayment amount.

Illustration
Suppose your total taxable income is Rs. 4,00,000.
Principal repayment is Rs. 1,50,000 and total Interest Payable is Rs.1,80,000.

The total deduction allowed is Rs. 2,50,000 (1+1.5Lacs) under the sections. Hence now your total taxable income becomes only Rs. 1,50,000 (4-2.5Lacs) and that saves a lot of money!

Financial Market Trends

Financial Market Trends reflects the changes (ups and downs) in the rates and prices of financial products traded in the financial markets. Market trends give valuable information about investment and trading opportunities available for prospective players in the financial markets. Financial market trends are mostly concerned with movements in the money and capital markets of any country. Financial market trends can also capture the trends in the interest rates arising from the monetary policies undertaken by the government and the central banks of the respective countries. The central bank in the case of India is the Reserve Bank of India (RBI) and that in the case of the USA is the Federal Reserve. In both the cases, inflation and exchange rates of the domestic currency are the determinant factors. One of the basic premises of financial markets is its integration and interrelation to other sectors of the economy such that changes in any sector of the economy rapidly gets transmitted through financial trends, which in turn affect the trends in the market. These market trends unfold in periods when there is interaction among the number of sellers (bears) and the number of buyers (bulls) in the financial market. The market trends or the sentiment of the market is defined as “bullish” or “bearish” in certain stocks according as its price or value is showing an upward or downward trend. 

Some of the primary market trends in this context can be defined as the bull market and the bear market. A bull market tends to be associated with increasing investor confidence in the performance of the shares and stocks and instigating them to buy more with the expectation of further capital gains. A bear market is accompanied by widespread pessimism about the performance of the financial market. Bear market trends are observable in cases of prices of a key stock market index falling over a period of time from a recent peak period. The “great depression” of the 1930's in the US economy occurred mainly due to continuing bear market trends in the US stock markets in preceding years. Technical analysts of the stock market will state that the bulls and bears of the stock markets are a cyclical feature and thus many speculators and investors exploit these to reap the maximum capital gains. Business cycles, according to many, are at the heart of analyzing market trends in an economy as expansion and contraction tend to occur at regular intervals. While an exaggerated bull market run fuelled by over confidence and speculation leads to a stock market bubble (increasing anticipation of this symptom is found in China), exaggerated phases of the “bear run” can lead to a stock market crash and a recession.

The stock market or the share market is one of the fundamental components of the financial markets and one can get a good idea of where the market is headed by relying on two pieces of information: namely price and volume of the number of shares traded on a particular exchange on a daily basis. If the market has a high-volume day and prices (of the indexes) are up, usually an upward market trend is observed which will entail a buying spree from mutual funds and institutional investors who are the volume buyers and sellers that move the financial market. On the other hand, a high-volume day with prices falling (more sellers then buyers) could indicate a downward market trend which will be associated with big players pulling out of the market.

There are also temporary changes in stock index prices within a primary trend which can arise due to certain extraneous causes (such as the 9/11 attacks on the USA severely affected the Dow Jones Industrial Average which plunged by 684.81 points to 8920.70 on September 17, 2001. financial market trends can also be about secular market trends which are defined as long-term trends that last 5 to 20 years and consist of several sequential primary trends. Secular market trends can also be divided into secular bear and bull markets.

Some of the leading Stock Exchanges with their Indices are listed as follows :

·                             Bombay Stock Exchange (India): Sensex

·                             National Stock Exchange (India): Nifty

·                             New York Stock Exchange (NYSE): Dow Jones Industrial Industrial Average (DJIA), Standard & Poor (S&P) 500

·                             Tokyo Stock Exchange (TSE): Nikkei

·                             London Stock Exchange (LSE): FTSE 100, FTSE 250, FTSE 350

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What’s on the menu for tax savings

What’s on the menu for tax savings

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A look at the various options available to investors, in terms of risk and return potential.

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Available, a wide range of options.

Amit Thakkar

Death and taxes are a certainty. Financial planning takes care of both of them. Earlier, tax savings were done out of compulsion, mostly in the last quarter of the financial year. But today, the scenario has changed.

Investors now plan their tax affairs and investments after considering the return potential. Generally, any investment should be weighed and assessed in three contexts.

Security/risk.

Liquidity.

Finally, returns.

Investment if not secured, or risk if not managed, can create pitfalls for the investors. Liquidity ensures the availability of funds. Returns should be strong enough to beat the inflation and fulfil other financial objectives. Therefore, one should apply all these tests before choosing from the tax-saving options available.

Under section 80C of the Income Tax Act, tax deductions are available for the following investments:

Life Insurance premium paid for policy. Eligible assesses are individuals/ HUFs.

Sum paid under contract for deferred annuity.

Contribution to Employees Provident Fund.

Contribution to Public Provident Fund.

Contribution to Recognised Provident Fund.

Contribution to approved Super Annuation Fund.

Subscription to any notified security or notified deposit scheme of the Central Government.

Contribution to Unit Trust of India for Unit Linked Insurance Plan.

Principal re-payment for housing loan.

Subscription to any notified saving certificates.

Subscription to any units of a notified Mutual Fund or the Unit Trust of India.

One should weigh and assess these deductions on the criteria of returns/safety/liquidity.

PPF (Public Provident Fund)

This is a popular investment. At present, it gives 8 per cent tax-free returns, which is as good as 11 per cent pre-tax returns for an individual who is in the highest tax slab of 30 per cent.

It is fully secured and offers guaranteed and timely returns. However, it is not very liquid and the scheme is for a period of 15 years, which is further extendable for five years.

Withdrawals are possible only from the seventh year.

INSURANCE

Insurance cover needs should be carefully assessed according to the life stage of a person and other factors.

Family size, children’s needs, earnings levels and encumbrances are factors one has to consider while deciding on the extent of the cover. It is advisable to separate Insurance from investments.

Any insurance product has, apart from mortality charges, high administrative costs, which also applies to the investment component of insurance.

Term Insurance can be an appropriate and necessary instrument for a young family with children .

One has to carefully assess one’s requirements before committing oneself because such products have a very long tenure and fixed payments.

Equity Linked Saving Schemes

ELSS is a tax saving Mutual Fund. If the risk tolerance of an investor is high, it is an ideal saving instrument for wealth creation. It scores very well on liquidity. It has only a three-yearlock-in period. Further, if you opt for the dividend plan, it can start giving you tax-free returns immediately. As maturity is not until three years, capital gains from such investments are also tax free.

Historic returns from such products have been high for three-and-five-year horizons. The risk in ELSS can be managed by opting for SIP (Systematic Investment Plan) mode. SIPs are a way to ride out the volatility of the stock markets. However, those who are retired and have a bare minimum of funds should not consider it.

National saving certificates

This is also a savings instrument managed by the Post Office. Interest income from the same is taxable because the deduction under section 80 L has been withdrawn.

As the horizon for investment is eight years, it is not that liquid. But it is a secured investment issued by the Government.

FIXED DEPOSITS WITH SCHEDULED BANKS.

With effect from 2007-2008, FDs with scheduled banks for a term of five years, if notified, are eligible for tax deductions.

This option is very suitable for retired persons, widows and others with a low risk appetite.

Due to the recent rise in interest rates, this option offers decent returns and also scores high on the yardstick of security. But interest receivable is taxable.

Tax savings — Higher returns, optimal portfolio

Tax savings — Higher returns, optimal portfolio

Suresh Krishnamurthy

IN THE end, the Budget proposals must have come as a pleasant surprise to salaried taxpayers and the self-employed, especially the latter. The expected overhaul of personal tax laws has not increased the tax incidence, and taxpayers have ended up with a pretty fair deal. The proposals will result in lower taxes, whether you save or not. If you save, you will gain more.

The crucial change, which can galvanise personal investing, is the introduction of a consolidated limit of Rs 1 lakh for all tax-saving investments without any ceiling on individual options, and for certain expenditure items.

Portfolio allocation, however, can now be optimised, with a certain proportion reserved for equity . There is no need to hold a portfolio separately for tax savings and another for other investments. This could increase returns significantly.

The present dispensation should, however, only be viewed as a window of opportunity that will close any time.

The changes represent the first steps in the transition to a state in which investments that earn tax savings will be taxed at the time of redemption. As things stand, investments which earn tax savings are not taxed at the time of redemption. Investors, as such, need to be on guard and should not fritter away the advantage by investing in low-return options. They particularly need to guard against aggressive marketing of sub-optimal insurance plans.

Limited options

Until now, investors suffered from a severe dearth of options. Consider this.

The just-concluded public offer of bonds by IDBI attracted subscriptions of Rs 2,100 crore when the offer size was only Rs 800 crore; the coupon on offer being less than 6 per cent. This is because you had no option if you wanted tax savings from infrastructure bonds.

In the year ahead, however, you need not restrict yourself to these bonds. You could invest in pension plans of mutual funds and insurance companies or in small savings schemes. These options offer significantly higher returns than infrastructure bonds.

Even the National Savings Certificate, which offers an annual return of 10.4 per cent for investments made after the new tax laws come into effect, offers a better deal than infrastructure bonds. The yield-to-maturity of infrastructure bonds, such as those issued by IDBI, even under the existing laws, was lower at about 9.4 per cent. If the coupon rate remains unchanged, the yield will plunge to 8.2 per cent under the new laws.

In the proposed tax structure, the NSC is a sub-optimal option as the interest accrued each year would be subject to tax. Investment options such as provident fund that provide tax-free interest will fetch higher returns. Employee provident fund, for instance, can fetch returns of about 12 per cent.

Expenditure: First claim

Before making investments to get the benefit of tax savings, however, you may want to use the specific expenditure that is allowed as part of the limit of Rs 1 lakh. This will help you get tax savings when your annual investments are less than Rs 1 lakh. The list of such expenses includes:

Stamp duty and registration fees paid at the time of purchase of house property, Repayment of principal on existing and new home loan, Tuition fees paid in respect of child (It is not restricted to two children. If you invest Rs 1 lakh or more each year then it does not matter. You will get the entire benefit even without having to show the expenditure as part of the limit. If such individuals were in the 20 per cent tax bracket, the tax benefit would reduce the cost of a 9.5 per cent fixed rate home loan to about 6 per cent. If they are in the 30 per cent tax bracket then the effective interest rate would come down to about 4 per cent. If the fixed rate is 9 per cent, then the effective interest rate would come down to 3.5 per cent for an individual in the 30 per cent tax bracket. Equity or not If employee provident funds can fetch me after-tax returns of 12 per cent per annum, do I need to invest in equity at all? This is a legitimate question, especially for investors with either a lot of money in their hands or none at all. Equity is appropriate for these investors, too. Consider the risks involved in EPF or PPF. The rate of interest could fluctuate and could trend lower over the next few years. If liquidity in the system keeps rising and the economy is in good shape, then the interest rates offered by these schemes could dip. Importantly, EPF managers themselves are looking to invest in equity to sustain the returns at higher levels. In addition, it would be appropriate to compare the returns of equity and debt without tax benefits. For instance, EPF offers you 9.5 per cent and PPF 8 per cent. But with the economy poised to grow steadily over the next few decades, return expectations of about 12 per cent from equity do not seem unjustified. Optimal portfolio First, for most investors, there is no need to consider a portfolio for tax savings and another for non-tax saving. This is true if they have a long-term perspective and the schemes they invest in are largely restricted to provident funds, pension funds offered by mutual funds and insurance companies. This is also the case for most investors who lack the expertise to invest in stocks directly. Incidentally, there are only a couple of pension funds offered by mutual funds now. The array of available options is, however, likely to increase significantly over the next year. In this backdrop, allocation of 50 per cent to balanced fund options in pension plans of mutual funds and insurance companies appears optimal. It would peg an investor's exposure to the equity market at 20-25 per cent. This would enhance returns and also appeal to the conservative mindset of most investors. The rest can be invested in provident funds and pension plans that invest their entire assets in debt investments. If they have a shorter-term perspective of less than 10 years, then they can consider investing 40 per cent in mutual funds and split the rest between small savings and provident funds. While investing in the pension plans of insurance companies, taxpayers should ensure that their purchase of term insurance is not more than what they need. If you buy more term insurance than what appears justified under the circumstances, it will only act as a drag on returns. If you want to invest more than Rs 1 lakh and prefer debt options, you should seriously consider debt mutual funds. This is because the Budget has eroded the competitiveness of the POMIS significantly. Its yield-to-maturity under the new dispensation — with interest not deductible under Section 80-L — comes down to 7.5 per cent, as against 9.3 per cent earlier. With yields on corporate debt inching higher to above 7 per cent, tax-efficient and liquid debt mutual funds can offer competitive returns.